Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility

Oben Ceryan, Ozge Sahin () and Izak Duenyas ()
Additional contact information
Ozge Sahin: The Johns Hopkins Carey Business School, Baltimore, Maryland 21202
Izak Duenyas: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109

Manufacturing & Service Operations Management, 2013, vol. 15, issue 1, 86-101

Abstract: Firms that offer multiple products are often susceptible to periods of inventory mismatches where one product may face shortages while the other has excess inventories. In this paper, we study a joint implementation of price- and capacity-based substitution mechanisms to alleviate the level of such inventory disparities. We consider a firm producing substitutable products via a capacity portfolio consisting of both product-dedicated and flexible resources and characterize the structure of the optimal production and pricing decisions. We then explore how changes in various problem parameters affect the optimal policy structure. We show that the availability of a flexible resource helps maintain stable price differences across products over time even though the price of each product may fluctuate over time. This result has favorable ramifications from a marketing standpoint because it suggests that even when a firm applies a dynamic pricing strategy, it may still establish consistent price positioning among multiple products if it can employ a flexible replenishment resource. We provide numerical examples for the price stabilization effect and discuss extensions of our results to a more general multiple product setting.

Keywords: pricing and revenue management; dynamic pricing; capacity flexibility; inventory control; substitutable products (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://dx.doi.org/10.1287/msom.1120.0404 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:15:y:2013:i:1:p:86-101

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().